Importance of Actual Status of Stockholders in Fraud Claims

In Pogue v. Hybrid Energy Inc., C.A. No. 11563–VCG, the Court of Chancery of Delaware granted Hybrid Energy Inc. (“Defendant”) a motion for summary judgment and denied James Pogue (“Plaintiff”) the right to inspect record rights under 8 Del. C. § 220.

According to the allegations in the complaint, Plaintiff received, at the time he was hired by Defendant, a stock certificate representing one million shares of common stock. According to the record, however, Defendant, at the time, had no treasury shares available to distribute; its certificate of incorporation authorized the issuance of only 1,500 shares, which were all then outstanding and held by its principal, Thomas Lull.  According to Plaintiff, he received “dividends” and was listed as the owner on the Defendant’s stock ledger.  Nonetheless, Plaintiff “concede[d] that the issuance was void”. 

Plaintiff sought books and records under Section 220 of the Delaware General Corporation Law (“DGCL”). Defendant responded that Plaintiff was not a stockholder and therefore had no standing to request such records.

Section 220 provides that "[a]ny stockholder" has inspection rights.  "Stockholder," in turn, is defined as "a holder of record of stock . . . or a person who is the beneficial owner of shares of such stock."  Section 220 grants such rights to stockholders. A plaintiff who seeks inspection of records other than the stock ledger or list has the burden of establishing stockholder status.

In general, the presence of a shareholder on the stock ledger will suffice to make a prima facie case for ownership.  Id.  (“ the stock ledger controls record-stockholder status, and a stockholder may point to the stock ledger to show, prima facie, that she is in fact a holder of record.”).  Nonetheless, stock ledger creates a presumption that can be rebutted.  To conclude otherwise “would be nonsensical and inimical to the purpose of the statute.”  Rebuttal requires “clear and convincing evidence.” 

The court reasoned that the stock issuance was void.  As the court reasoned:  “The Plaintiff . . .  received a void, allegedly fraudulent stock certificate. This gives him a chose-in-action, a contract or fraud claim against the issuer or its principal. It does not, however, make him a stockholder with an ownership interest in the corporation, and to find standing to vindicate such a non- existent interest would not advance the purpose of the statute.”  Accordingly, the Defendants motion for summary judgement arguing the Plaintiff lacks standing was granted.

The primary materials for this post can be found at the DU Corporate Governance Website.